3 December 2013 US Derivatives Spotlight The low forward combined with depressed long-dated implied volatility has resulted in the most attractive pricing on long-dated call options in many years. As an example of how marked this difference can be, if we compare prices of 6O-month maturity SPX ATMS calls on 30-Jun-03 and 11-Oct-13. two periods with the same implied volatilities but very different forwards, the difference in premium is -4.5% (19.1% vs. 14.6%). However, if we compare the option prices in terms of the forward (ATMF strikes), then the above mentioned spread in the premium disappears. Historical performance of long-dated calls Option strategies have had bettor risk-adjusted returns vs index performance In this section. we look at the historical performance of different long-dated call strategies . We compare the performance of the option positions vs. the total return on the SPX Index. These backtests focus on SPX 18M and 36M options. We chose the 18M maturity for our backtests since many investors prefer exchange-listed options to OTC and 18M is the farthest listed maturity for which we had consistent data for the SPX. We chose the 36M maturity to study the results for even longer-dated options whose vega exposure does not decay as rapidly. Our results are largely similar among the two maturities studied and include those for Calls and call spreads either held to maturity or rolled' after some time has passed in the life of the option • Call diagonals (buy long-dated calls financed by selling 1M calls) where the long-dated call is either held to maturity or rolled after some time has passed in the life of the option We find that: • Call spreads tend to have the highest risk-adjusted return, even after scaling their delta higher to match the initial delta of just the long call leg • Selling 1M 2% annualized premia calls to finance the purchase of long-dated calls has had better risk-adjusted performance compared with eq